Hugo Chavez’ has his own economic Red Friday as he devalues the currency 63.7%January 9, 2010

As usual it was an irresponsible and perverse performance by Hugo Chavez. The President that likes to go on nationwide TV to announce the most trivial things, from phantom death threats against him to handing out fake loans to people, did not dare to do the same to announce a dramatic devaluation which is a consequence of his own irresponsible policies. But he even dared to call Venezuela’s foreign exchange controls “efficient”, despite the fact that he was taking this dramatic step and that the exchange controls have been not only the biggest corruption racket in the country’s history, but also represented a perverse subsidy to the rich, via preferential rates for travel and the import of some luxury goods.

And as if the old system was not bad enough, Chavez announced a dual Government exchange rate, triple if you take into account the swap rate, devaluing the official rate of Bs. 2.15 per dollar to Bs. 2.6 per dollar, a 20.9% devaluation, which will be applied only to foodstuffs, medicines, machinery and certain remittances abroad. The remainder of imports will suffer a 100% devaluation to Bs. 4.3 per US$, including supposedly travel allowances and airline tickets, although this was not included in the formal announcement.

Based on last year’s imports of goods, this implies that 45.9% of the goods imported will have a price increase of 20.9%, while 54.1% will have a price increase of 100%, for a weighted average of 63.7% for the increase in price of all of the country’s imports. Thus, the inflationary impact of the devaluation will be very high, much higher than the irresponsible estimate by the Minister of Finance that this will only represent a 3-5% increase to the CPI. It is my understanding that technical people in the Ministry of Finance were not even asked to calculate the impact of the devaluation, another demonstration of the primitive nature of this administration.

And as if the devaluation itself was not the result of the irresponsible economic policies of the last few years, the Government guaranteed that this will be only the first of such announcements to come, as it announced that the Central Bank will transfer US$ 7 billion of the country’s international reserves to the development fund Fonden, leaving reserves at US$ 28 billion, while monetary liquidity stands at a record Bs. 236 billion. Just to give you some perspective, the last time the official rate was devalued in 2005, M2 stood at Bs. 46 billion and international reserves were at US$ 24 billion. Thus, at the time there were practically 2 Bolivars per dollar of international reserves with the official rate at Bs. 2.15 to the dollar, while today there are Bs. 8.42 to the dollar with the lowest official rate at Bs. 2.6. (Although the weighted average of imports stands at Bs. 3.51 per dollar)

This is simply unsustainable, you can not increase monetary liquidity (M2) by a factor of 5, while maintaining international reserves constants and expect inflation to go down or the exchange rate to be sustainable at current levels. The laws of economics can be stretched but not violated (or raped really).

Given that inflation was already going to top 30% in 2010 and if we assume that the import component of goods consumed in Venezuela is almost at 50%, then one would expect an additional 30% spike on inflation from the announced devaluation. Not a pretty picture. The impact of the devaluation may be slightly smaller on the poor quantitatively, because since most food imports are done at the lower rate, and the poor spend more of their income on food, they will feel it less, even if still a huge effect.

There is, of course, a third rate, the swap parallel rate, which people think will actually jump on Monday. The Government said it will intervene in that market and that the Central Bank will be allowed to do so. With PDVSA selling dollars at Bs. 4.3, there is less pressure on the oil company to sell dollars in the swap market. But Chavez also said something like “the Government will control (or monitor?) imports with dollars from company’s own resources”. This seems to suggest that the Government may be planning to limit imports that are not made with CADIVI dollars. Just the initial confusion on this issue may actually lower demand in the swap market initially. (But the policy would be suicidal as shortages would soar) Thus, I would epexct a drop at first and then the swap rate is likely to rise, not only because there are more Bolivars out there and less dollars, but because the Government has practically approved the swap rate as a third rate, when it says the Central Bank will intervene, which should give more confidence to those that are still hesitant to buy dollars aggressively at the swap rate.

But additionally, there is the effect of the sharp drop in demand induced by the 60-plus increase in the price of imports. For the first few months, this should relieve some of the pressure in the swap rate as importers are more cautious on how much to import and the consumer contracts.

Combine the effect of the devaluation with that of the banking crisis and the already high levels of inflation and economic contraction and you now have stagflation on steroids and a very difficult political year for the Government. Hugo Chavez who based his popularity on the delay of implementations of realistic economic policies, has met his own Red Friday. Unfortunately, he is once again attacking the consequences and not the origin of the problems. Even worse, he is exacerbating them once again by removing US$ 7 billion from international reserves.

While it is true that this improves the ability of Venezuela’s industry to export, such exports were down 50% last year and the inflationary impact of the measure itself may block any ability to compete. Recall that many of these exporters, like the Government’s industrial complex, are forced to sell their dollars at the official rate, now Bs. 2.6 per $, while enduring the high levels of inflation of the country.

Finally, about the only positive aspect that this creates is that the country’s debt is likely to enjoy a huge rally in the upcoming days, as foreign investors perceive that the ability of the country to fulfill its international commitments has improved dramatically with the devaluation. And it has indeed. With this devaluation, PDVSA and the Government will have much more Bolivars, which relieves the pressure on the dollars the Government has, as well as on the need to issue new debt, which is music to the eras of foreign investors. Most investors find Venezuela’s debt quite attractive at even higher levels than these, but it is the specter of the Government issuing new debt constantly that has kept them away from it in the recent past. This eases this concern, at least until the end of the year.

Not a pretty picture for the Government, particularly because this is only a short term solution. Once again, if oil prices do not go up significantly, a year from now, we may be witnessing a similar performance of a new adjustment to the exchange rate. Amazingly, it is incredible that these same measures were not undertaken in September so that their inflationary spike would have been felt last year and not in 2010, an electoral year. The Government now has more money in its hands, but the people will have less, by the end of the year the same distortions and needs of the Government of a month ago, will once again be present.

A WSJ NEWS ROUNDUP CARACAS -- President Hugo Chávez said he ordered two F-16 jets to intercept a U.S. military plane that twice violated Venezuelan airspace on Friday in what he called the latest provocation in the South American nation's skies.

Brandishing a photo of the plane, which he described as a P-3, Mr. Chávez said the overflight was the latest incursion in Venezuelan skies by the U.S. military from its bases on the Netherlands' Caribbean islands and from neighboring Colombia.

There was no immediate response from the U.S. Defense Department or the White House.

Mr. Chávez said the F-16s escorted the U.S. plane away after two incursions lasting 15 and 19 minutes each.

The perceived threat of U.S. intervention has become a central element of Mr. Chávez's political discourse and a rallying cry for his supporters.

Foes say the president is hyping the idea of a foreign threat to distract Venezuelans from domestic problems such as a recession and inadequate public services. Mr. Chávez surprised the diplomatic world in December when he accused the Netherlands of abetting potential offensive action against his government by granting U.S. troops access to its islands close to Venezuela.

The Dutch government says the U.S. presence is only for counternarcotics and surveillance operations over Caribbean smuggling routes.

In Venezuela the situation is getting worse by the day. No water, no electricity, high inflation (over 35% a year since 1984), dropping oil production, scarcity of many food items, VERY HIGH crime rate, kidnappings, a banking scandal with Chavista families at the center. List goes on and on.

Venezuela is and has always been very president centric. The president is seen as the Messiah who solves everything. One would think that by this time Chavez's popularity rating would be nil but the fact is that he has been successful at handing off the blame, left and right, to foreign powers and to "incompetent underlings." It's almost as if he had studied the screen play of 1984 where Big Brother is always cooking up foreign wars to distract the people.

This weekend, rumor has it that the devaluation was done to distract the people from the huge failure in water and electric management. I posted a long piece about the devaluation by Miguel Octavio of "The Devil's Excrement." He seems to have forgotten entirely about the water and electric problem. Attention span from 5 minutes to maybe two or three day!

The Caribbean Sea has been patrolled by the US Coast Guard for decades. Sailors should be happy because piracy has declined considerably since the patrolling started. Let's not forget that, in the world view, the Caribbean Sea is the American back yard as much an the Ukraine and Georgia are part of the Russian back yard and Tibet is part of China's back yard. As much as we might dislike this back yard concept, those are the facts on the ground. An expert politician can exploit these things to his personal advantage and Chavez does so masterfully.

Just a few days ago, a Colombian journalist, who sees through the ruse, accused Chavez of confusing Santa's sled with airplanes. And the game goes on.

Venezuelan Vice President Ramon Carrizalez has left the government, reportedly citing personal reasons.

"The President of the Republic… accepted the resignation that was presented for strictly personal reasons by Vice President Ramon Carrizalez," Communications Minister Blanca Eekhout said in a statement on state television, Reuters reported.

The vice president, who also held the defense ministry portfolio, stepped down from that post as well.

Carrizalez previously served as infrastructure minister and housing minister.

State-backed news network Telesur said Carrizalez's wife, Environment Minister Yuviri Ortega, had also stepped down, but the network claimed there was no link between the decision and any differences she had with the government.

CARACAS, Venezuela — Police fired tear gas to chase off thousands of students demonstrating in the capital Thursday, a fifth day of protests against President Hugo Chavez for pressuring cable and satellite TV providers to drop an opposition channel.

Some of the protesters threw rocks at police in riot gear when officers moved to break up the rally outside the offices of the state-run electricity company.

While charging that the government is trying to curb criticism, the students also used their demonstration to call attention to electricity shortages plaguing much of Venezuela and other pressing domestic problems like double-digit inflation.

University students have taken to the streets daily since Sunday, after government pressure led cable TV services to drop Radio Caracas Television International, which has long been a critic of Chavez's socialist policies.

"We are not going to allow continued shutdowns of media outlets that tell the truth, and we are not going to allow ineptitude and inefficiency to continue," said Nizar El Sakih, a student leader.

Critics of the government say Chavez is responsible for domestic problems ranging from double-digit inflation to violent crime to rolling power blackouts.

The government says RCTV was removed for refusing to comply with a new rule requiring media outlets to televise mandatory programming, including Chavez's speeches.

Chavez accused students of trying to stir up violence as a means of destabilizing his government.

"There are some attempting to set fire to the country," Chavez said in a televised address Thursday. "What are they seeking? Death."

He said unidentified assailants armed with assault rifles shot at National Guard troops Wednesday in the city of Merida, where two soldiers suffered gunshot wounds. A military barracks in the city of Barquisimeto was also attacked, he said.

Chavez vowed to crack down on street demonstrations that turn violent.

"We cannot permit this," he said. "The state and the government must impose authority."

Ten students were accused of fomenting public disorder Thursday in the eastern city of Barcelona – a day after they led protests that ended in clashes with police, Fortunato Herrera, a lawyer representing the students, told the local Globovision TV channel.

Student leader Jonathan Zambrano told Globovision that 22 protesters were arrested in the city of Barinas. The students were released, Zambrano said, after university groups agreed to call off street demonstrations.

Two youths were killed in Merida on Monday – a day after the protests began. Dozens of people have been injured during the week's demonstrations.

JORGE SANTOS/AFP/Getty ImagesView of a state-owned PDVSA gas station in Caracas Venezuelan state oil firm PDVSA may withdraw from the 320,000 barrel-per-day Isla refinery it operates in Curacao in protest of U.S. military “provocations” on the Dutch Caribbean island, Ultimas Noticias newspaper reported Feb. 27, citing an interview with Venezuela’s oil minister Rafael Ramirez. The Isla refinery, which processes sulfur-heavy crude from Venezuela’s Lake Maracaibo, is operated by PDVSA under a lease the firm has with the government of Curacao. PDVSA has long been trying to negotiate the purchase of the refinery from the Curacao government, but PDVSA is also in a severe financial crunch. Venezuelan President Hugo Chavez’s heavy reliance on the state oil firm’s revenues to support his government programs and maintain popular support have stressed PDVSA operations, resulting in a decline in production and strain on Venezuelan refining operations. The Isla refinery in particular has developed into a financial liability for PDVSA since a Curacao court ruling in June 2009 decreed that PDVSA would have to pay roughly $3 million for violations in sulphur dioxide emissions, and $300,000 per day for further violations.

Venezuela is already facing serious refining problems due to mismanagement and a significant drop in foreign investment. Exacerbating matters is a growing electricity crisis that has had a significant impact on crude oil processing. The problems have turned critical enough that Venezuela, despite being a major oil producer and refiner, had to increase fuel purchases from abroad in Sept. 2009 to keep up with domestic demand. The Venezuelan government heavily subsidizes gasoline to maintain political support among the population, a policy that cuts further into PDVSA’s bottom line. Chavez has spoken frequently about the threat of U.S. military invasion of Venezuela, and his oil minister now appears to be using this pretext as a way to alleviate PDVSA’s financial obligations by withdrawing from its contract. The development does not speak well for PDVSA’s financial solvency and thus Venezuela’s overall political stability.

Shell and Creole (EXXON) operated two of the world's largest refineries in Aruba and Curaçao as a way to avoid taxation in the producing country (Venezuela) and in the consuming country (USA). When Venezuela changed it's tax law these tax havens lost their appeal and the refineries were shut down with serious impact on the islands' economies. Eventually PDVSA would reopen one of the refineries as a measure of good will to our neighbor. I seriously doubt if these refineries ever had any value except as tax havens.

AFP/Getty ImagesIranian Revolutionary Guard special forces participate in military exercises in 2006SummaryA recently published U.S. Department of Defense report claims that members of the Iranian Islamic Revolutionary Guard Corps’ Quds Force (IRGC-QF) currently are operating in Venezuela. STRATFOR sources claim that the relatively limited number of IRGC-QF in Venezuela are focused on intelligence operations, paramilitary training for the Revolutionary Armed Forces of Colombia and security assistance for the government of Venezuelan President Hugo Chavez. Though the IRGC-QF presence brings certain benefits to the Venezuelan government, Chavez also has an interest in keeping their proxy militant focus on Colombia.

AnalysisU.S. Secretary of Defense Robert Gates submitted a report to Congress in April on the current and future military strategy of Iran. Included in the report is a claim that the Quds Force, the overseas operations arm of Iran’s elite military force, the Islamic Revolutionary Guard Corps (IRGC), has developed a significant presence in Latin America, particularly in Venezuela. STRATFOR sources connected to this Iranian military unit have confirmed a small but notable presence in Venezuela. Though IRGC-QF members in Venezuela are believed to be providing some security assistance to Venezuelan President Hugo Chavez, the Venezuelan leader does not appear interested in incurring reprisals from the United States and is consequently trying to direct the anti-U.S. activities of the IRGC-QF toward neighboring Colombia.

As the Pentagon report states, IRGC-QF members usually are stationed in foreign embassies, charities and religious or cultural institutions as intelligence officers to develop ties with the Shiite diaspora and other potential allies. The U.S. military even has labeled incoming and outgoing Iranian ambassadors to Iraq as IRGC-QF members. On a more narrow scale, the IRGC-QF arms, funds and trains various paramilitary groups as an extension of Iran’s well-developed militant proxy arm. The IRGC-QF is believed to have worked with proxies to orchestrate major attacks against U.S. and U.S.-allied targets, including the 1994 attack on the AMIA Jewish Community Center in Buenos Aires, the 1996 Khobar Towers bombing in Saudi Arabia and a number of insurgent attacks targeting U.S. soldiers in Iraq and Afghanistan. By keeping this elite unit in reserve in various pockets of the globe, Iran has the ability to carry out attacks under plausible deniability. The reality of Iran’s retaliatory options — made possible by the IRGC-QF — has factored heavily into U.S. war-gaming exercises against Iran.

Joined by their mutually hostile relationship with the United States, Iran and Venezuela have grown to be close allies in the past several years. A good portion of this relationship consists of rhetoric designed to grab the attention of Washington, but significant forms of cooperation do exist between the two countries. STRATFOR sources have indicated many of the inflated economic deals signed between Iran and Venezuela and the establishment of the Banco Internacional de Desarrollo (an Iranian banking subsidiary headquartered in Caracas) are designed to facilitate Iran’s money laundering efforts while providing the Venezuelan government with an additional source of illicit revenue.

The Iranian-Venezuelan relationship also extends into the militant proxy world. Though this information has not been confirmed, STRATFOR sources claim the current IRGC-QF presence in Venezuela is limited to roughly 300 members. This estimate could well be on the high side, considering the likelihood that it includes all IRGC-QF paramilitary trainers and personnel working under diplomatic, business and religious cover. Many of these IRGC-QF members are focused on developing relationships with Venezuelan youth of Arab origin, who are viewed as potential intelligence and militant recruits. Some of these recruits are brought to Iran for training, and STRATFOR sources claim that several Hezbollah trainers are included among the IRGC-QF personnel. However, these efforts remain limited given the relatively small size of the Shiite community in Venezuela, believed to be less than one percent of Venezuela’s Muslims, which comprise roughly four percent of the population.

A portion of IRGC-QF members are believed to interact with militants belonging to the Revolutionary Armed Forces of Colombia (FARC), Colombia’s largest paramilitary group. The Chavez government is widely believed to provide direct support for FARC rebels and smaller Colombian paramilitary groups, but the Venezuelan president also appears wary of the IRGC-QF interaction with these groups. A STRATFOR source has indicated that IRGC-QF links with FARC are designed to give Iran the option of targeting U.S. interests in Colombia should the need for retaliation arise (for example, in the event of a U.S. military strike on Iran). The source says the IRGC-QF does not have a presence in Colombia but supports FARC from the paramilitary group’s sanctuary along the Venezuelan border. While it remains highly doubtful that Iran would be able to exert the necessary influence over FARC to direct their attacks against U.S. targets, simply having FARC as the main culprit for attacks in Colombia could provide Iran with the plausible deniability it seeks in such attacks.

The Venezuelan government appears to be benefiting in part by hosting the IRGC-QF, but, like Iran, wants to ensure some level of plausible deniability. A STRATFOR source claims that some IRGC-QF members have been integrated into Venezuela’s National Guard and police force, where they provide assistance to the Chavez government in containing the opposition. IRGC-QF and Hezbollah personnel also are believed to be involved in irregular warfare training for some Venezuelan army units, in addition to FARC. Chavez has publicly endorsed the concept of “asymmetric warfare” in his restructuring of the Venezuelan army to guard against potential military threats from Colombia and the United States.

That said, Chavez also is wary of IRGC-QF activities directed at the United States. According to the source, Chavez has strongly cautioned Iran against allowing IRGC-QF to target U.S. interests in Venezuela itself. Despite his heated rhetoric against the United States, the Venezuelan president does not wish to invite a strong U.S. reprisal and would rather keep their militant focus on Venezuela’s main regional rival, Colombia.

Chavez ordered a 25% across the board salary increase except for the military. They get 40%. Such is XXI Century Socialism. You buy whatever you need, not with your own money but with the country's resources. Venezuela is being run as if it were Chavez's private farm.

Sigh, these brainless......... We do not need the monroe docterineto act, have some Sog command guys make a bunch of Iraqis dissappear in the jungle.......... Economic use of force, remaining small enough tio be deniable, and if it goes sour, use the same game they use- deny and counter charge.

I was unclear. I guess. My point in bringing up the monroe doctrine was for the US to ....."have some Sog command guys make a bunch of Iraqis disappear in the jungle" In the past we used battleships and marines or cia, read the book bitter fruit, and have done so for a century or more. My emotional response was...it is time to do it again The best response might be economic but we have to put a stop to this sort of thing before it escalates and causes some real problems.

It was everybody into the pool after Hugo Chavez took over the ranch of a former U.N. Security Council president who's been critical of the dictator.

Socialism: After 12 years in power and $960 billion in oil earnings, Venezuela's Hugo Chavez is down to stealing private swimming pools to bring the good life to Venezuela's "poor." It's a new milestone on his road to ruin.

Acting like Robert Mugabe on cocaine, Venezuela's dictator went on a shopping spree over the weekend, confiscating one farm and industry after another.

First, a flour factory run by Mexican multinational Gruma was plundered, followed by the nationalization of a bauxite unit of U.S.-based NorPro. After that, a steel subsidiary of Luxembourg-based Tenaris called Matesi was taken, along with a group of transport companies.

Unsated, Chavez then announced — via Twitter — the takeover of the private University of Santa Ines in Barinas state. And for good measure, he launched new exchange controls, another form of expropriation.

One taking stood out, however — a 370-acre ranch in Yaracuy state that grows oranges and coffee and raises cattle with 38 shareholding farm workers. The scenic property on an otherwise desolate stretch of highway is owned by Diego Arria, Venezuela's former president of the U.N. Security Council. It's been in his family since 1852.

Arria had spoken out against Chavez, so Chavez got personal. "If he wants to farm now, he will have to topple Chavez, because this now belongs to the revolution," El Presidente pronounced.

Arria told IBD he's been pressured for two years with acts of vandalism and the kidnapping of farmhands. A month ago, Chavista Ministry of Culture operatives approached him in Norway, demanding that he quit criticizing the Chavez regime. If he didn't "play ball," he'd lose the ranch, Arria was warned. "But I never negotiate with thugs," he said.

Chavez's red-shirts finally acted over the weekend, opening the farm to "the masses" in a show of class warfare. Chavista leaders from the National Institute of Lands headed first to Arria's living quarters, rolling over his bed, pawing through his wife's clothing and desecrating a chapel dedicated to the Arrias' late daughter.

For their big photo spectacular, they hauled in 300 or 400 children to swim in Arria's swimming pool, ride the ranch horses and tour the main house — encouraging the kids to take "souvenirs." Chavez said it was all proof he was "socializing happiness."

In reality, the attack on Arria's farm was proof of Chavez's own failures. Unable to create any prosperity, even after 12 years in power and a trillion dollars in oil cash, Chavez still resorts to crude medieval plunder to bring any spoils to his supporters.

It would be logical to think Venezuela's oil earnings would be sufficient to build swimming pools for the children of Yaracuy. But Chavez's destruction of property rights and rule of law from these confiscations — now numbering 500 or so, have ended any prospect of prosperity coming to the country's poor.

Not a single expropriated property in Venezuela produces what it produced when it was privately owned. In a year Arria's ranch will be a wasteland, and Venezuela will find itself importing even more than the 76% of its food it now imports.

With disrespect for property rights goes disregard for human rights, as the confiscation of the Arria ranch attests.

Denny, That's quite a photo and a story. It must be fun to steal other people's wealth and destroy it but like the story says, it is a "road to ruin". Why would anyone ever invest and create wealth again? For some reason the socialists think wealth destruction is a good thing.

But Cubans have lived under Castro's dictatorship for over 50 years and I don't know how long North Korea has been going on. Most dictators die of old age in their own bed. As long as a totalitarian regime is ruthless it can hold on forever. Only the weak fail.

People hate me for saying this but: All rights derive from the use or the threat of the use of force. Americans didn't get their freedom with a ballot box, it took a revolution and a war of independence. This is essentially what Diego Arria has been saying and it cost him his farm.

At some point one suspects that the laws of gravity and of supply and demand will re-assert themselves. What do you think happens then?

Crafty:

I live two blocks from where I grew up. I used to walk to school. Yesterday I retraced my boyhood walk. It used to be a nice neighborhood. Now it's a bit run down and the sidewalks are now an open market. I bought some fruit and vegetables. The stalls are manned by urban poor. They don't look any different from what they looked like years ago except that you see many more red shirts. They are just as polite as ever, as if nothing were happening in Venezuela. Of course, I did not talk politics with anyone so I don't know what they might be thinking. My impression is that these people were doing what people all over the world do. They were busy surviving.

When I go on Twitter I think I'm meeting mostly middle class folks and so called political leaders. The Venezuelans on Twitter are bitterly opposed to Chavez. It's as if I lived in two different countries, the anti Chavez middle class and the urban poor who don't have time for politics, who are too busy surviving.

What happens when we run out of supplies? People will go on surviving as best they can because that's the only alternative. In Thailand, when the government finally had its fill of demonstrators, they used live ammo on their own people. 80 or 100 dead? Who cares. Bury them and life goes on. It seems to me that in many places life is not as sacred as it might be in America. Remember Stalin or Mao, how many million did they kill? I don't mention Hitler because he was not killing his own like Stalin or Mao did.

What I do believe is that dictators can only be removed by force. In Thailand the opposition didn't have enough force, they didn't manage to win the military to their side as the people of Rumania did to get rid of Nicolae Ceauşescu. In Venezuela, Perez Jimenez fled when the military stages a coup, a counter revolution. Most dictators die in bed of old age. The only thing they cannot do is go soft. That is the end for a dictator.

I remember reading , , , Barrington Moore I think it was in my last year at Penn and he wrote of revolutions due to rising expectations and revolutations due to falling expectations. When the food and the money run out , , ,

A 54-year-old housewife fires a machine gun for the first time, lets loose a thunderous burst of gunfire and beams with satisfaction. A boot camp instructor shouts, “Kill those gringos!”

Thousands of civilian volunteers in olive-green fatigues train at a Venezuelan army base, where they learn to crawl under barbed wire, fire assault rifles and stalk enemies in combat. Known as the Bolivarian Militia, this spirited group of mostly working-class men and women – from students to retirees – are united by their militant support for President Hugo Chavez and their willingness to defend his government.

Chavez has repeatedly warned of potential threats: the United States, U.S.-allied Colombia and the Venezuelan “oligarchy,” as he labels opponents. He has called on recruits to be ready to lay down their lives if necessary to battle “any threat, foreign or domestic,” even though Venezuela has never fought a war against another nation.

1 The militia "is a personal army, a Praetorian Guard," said retired Rear Adm. Elias Buchszer, a Chavez opponent. He said despite Chavez's talk about repelling a U.S. invasion, the militia is really aimed at maintaining control, keeping him in power, and "making the country fear that if anything is done the militiamen are going to come out." A member of Venezuela's Bolivarian Militia takes cover during military training in Charallave, Venezuela. (AP Photo/Fernando Llano)

2 A member of Venezuela's Bolivarian Militia points her rifle during firing practice at a shooting range in Charallave, Venezuela. President Hugo Chavez has made a priority of building up the militia and has repeatedly warned of multiple potential threats: the United States, U.S.-allied Colombia and the Venezuelan "oligarchy," as he labels opponents. (AP Photo/Fernando Llano)

3 Members of Venezuela's Bolivarian Militia march during military training in Charallave, Venezuela. The militia is a practical tool for Chavez to engage his supporters, rally nationalist fervor and intimidate any opponents who might consider another coup like the one he survived in 2002. (AP Photo/Fernando Llano)

4 Most seem gung-ho for marching in the sun and getting their uniforms sweaty and dirty. Some cover their faces with black dust from the charred earth left by forest fires. They also enjoy the camaraderie, saying they spent one night hiking and watching a Chinese film. (AP Photo/Fernando Llano)

5 A member of Venezuela's Bolivarian Militia puts on lip stick before a swearing in ceremony led by Venezuela's President Hugo Chavez in Caracas. Members of the volunteer force range from the unemployed to electricians, bankers and social workers. (AP Photo/Fernando Llano)

6 As part of the training, members line up at a firing range aiming decades-old, Belgian-made FAL rifles at red bull's-eyes on paper targets 80 yards away. (AP Photo/Fernando Llano)

7 Instructors, including both experienced militia troops and army officers, say one objective is to ready the militia for a war of resistance against an occupying force. They allude to insurgents battling U.S. troops in Iraq and Afghanistan. (AP Photo/Fernando Llano)

8 Venezuela's Bolivarian Militia shouts slogans in support of President Hugo Chavez prior to their swearing in ceremony led by Chavez in Caracas. "We aren't here because anyone forced us to be. We're here because we're patriots," said Maria Henriquez, an unemployed 44-year-old who emerged covered with dust after crawling through a trench under barbed wire. As for Chavez, she said, "We'd give our lives for him." (AP Photo/Fernando Llano)

9 Venezuela's Bolivarian Militia gather in the dust after firing an anti-tank canon during military training in Charallave, Venezuela. (AP Photo/Fernando Llano)

10 Members of Venezuela's Bolivarian Militia run during military training in Charallave, Venezuela. President Hugo Chavez has made a priority of building up the militia and has repeatedly warned of multiple potential threats: the United States, U.S.-allied Colombia and the Venezuelan "oligarchy," as he labels opponents. (AP Photo/Fernando Llano)

11 The militia practice reacting to an ambush in the forest, camouflaged with mud-smeared faces and with dry grass stuck in the collars of their uniforms. They crouch for cover behind a pig pen and fire blanks into an abandoned building in a mock raid on hostage-takers. Spent shells clink onto the concrete as shots echo through the building, and one man shouts "all clear!" (AP Photo/Fernando Llano)

12 Members of Venezuela's Bolivarian Militia celebrate after an artillery exercise during military training in Charallave, Venezuela. Some who belong to the militia say Venezuelans have nothing to fear, that their only purpose is to protect the country and that their guns are locked away in military depots when not in use. They also carry out missions including standing guard at state-run markets, and say they would be prepared to respond in earthquakes or other disasters. (AP Photo/Fernando Llano)

13 Venezuela's President Hugo Chavez salutes members of his Bolivarian Militia in Bolivar Avenue shortly before the group's swearing in ceremony in Caracas. (AP Photo/Fernando Llano)

14 Members of Venezuela's Bolivarian Militia shout in Spanish "Yes I swear" prior to their swearing in ceremony on Militia Day in Caracas. One of the militia's guiding principles is constantly drilled into the group as they salute in unison shouting: "Socialist homeland or death! We will be victorious!" (AP Photo/Fernando Llano)

Uncle Sam and China. China is buying up resources all over the world as if there is no tomorrow. They need it to keep up the pace of their economic expansion and a bit of Red never did bother them.

From what I gather, with regard to Venezuela the US only seems to be worried about the drug trade and money laundering. The current US administration is ideologically aligned with world wide socialism, they only hit hard at true allies like Israel. Go figure. From the Arizona brouhaha it seems that the administration is more inclined to help your southern neighbors than American citizens.

With Obama in power America's enemies are rejoicing. Look at how Iran is thumbing its nose at America. The North Koreans happily sink a South Korean ship and test-fire missiles. Hamas and Hezbollah build up their rocket arsenals. Brazil and Venezuela have a nuclear deal with Iran. Never has America looked as weak as it does today, not for lack of military power but for lack of will, because the Democratic party is all in favor of UN style world government. You would be right back to taxation without representation.

Hmmm, <insert rant> about how, once again this oil addiction thing is crippling our ability to act internationally according to our founding principles <enough said> Iran also working to spread nukes, welcome to a more dangerous worls kids. Too bad we are all stuck in the same basket.

I thought Venezuela was pretty average/stable for a country until this happened. someone took their eyes off the ball during the Clinton years due to peace breaking out, and now we have these various messes to deal with. Too many of them in our backyard..........

- But this oil addiction thing to me is synonymous with freedom. Freedom requires mobility and mobility uses oil. A gallon of gas is the most safe, compact, stable, efficient, and still affordable form of transportable energy that we have. Our refusal to produce our own that creates the import addiction and the current oil spill will set that even further back indefinitely. You could drive a short distance in a form of an electric golf cart and I am fascinated by the transportation capabilities of homegrown compressed natural gas, but nothing else so far matches the performance of a gallon of gas.

"someone took their eyes off the ball during the Clinton years"

- I have seen no indication that South Americans want U.S. intervention no matter how bad things get. The low point I observed (from my secure midwest location) was under Bush and then Sec. State Colin Powell in August 2004. The American diplomats did not know how to tell self-appointed observer Jimmy Carter to take a hike and send in real election observers (and Chavez would not have accepted real observers). The polls were 40-60 against Chavez while he won 60-40, a 40 point swing. Carter quickly signed on to the result, putting the Bush administration in a bad situation of either recognizing the result or rejecting it based on no evidence. The appeasement did us no good as the anti-Bush anti-US rhetoric and relations from Chavez only increased. Had we rejected the referendum result, we would have the same reality - an illegitimate leader running Venezuela. Personally I am more taken aback by the 40% who favor this type of rule (same in the U.S.) than I am by the electoral cheating. -------http://www.opinionjournal.com/editorial/feature.html?id=110005586REVIEW & OUTLOOK Wall Street Journal (from 2004)Conned in CaracasNew evidence that Jimmy Carter got fooled in Venezuela.

Thursday, September 9, 2004 12:01 A.M. EDT

Both the Bush Administration and former President Jimmy Carter were quick to bless the results of last month's Venezuelan recall vote, but it now looks like they were had. A statistical analysis by a pair of economists suggests that the random-sample "audit" results that the Americans trusted weren't random at all.

This is no small matter. The imprimatur of Mr. Carter and his Carter Center election observers is being used by Venezuelan President Hugo Chavez to claim a mandate. The anti-American strongman has been steering his country toward dictatorship and is stirring up trouble throughout Latin America. If the recall election wasn't fair, why would Americans want to endorse it?

The new study was released this week by economists Ricardo Hausmann of Harvard and Roberto Rigobon of MIT. They zeroed in on a key problem with the August 18 vote audit that was run by the government's electoral council (CNE): In choosing which polling stations would be audited, the CNE refused to use the random number generator recommended by the Carter Center. Instead, the CNE insisted on its own program, run on its own computer. Mr. Carter's team acquiesced, and Messrs. Hausmann and Rigobon conclude that, in controlling this software, the government had the means to cheat.

"This result opens the possibility that the fraud was committed only in a subset of the 4,580 automated centers, say 3,000, and that the audit was successful because it directed the search to the 1,580 unaltered centers. That is why it was so important not to use the Carter Center number generator. If this was the case, Carter could never have figured it out."

Mr. Hausmann told us that he and Mr. Rigoban also "found very clear trails of fraud in the statistical record" and a probability of less than 1% that the anomalies observed could be pure chance. To put it another way, they think the chance is 99% that there was electoral fraud.

The authors also suggest that the fraud was centralized. Voting machines were supposed to print tallies before communicating by Internet with the CNE center. But the CNE changed that rule, arranging to have totals sent to the center first and only later printing tally sheets. This increases the potential for fraud because the Smartmatic voting machines suddenly had two-way communication capacity that they weren't supposed to have. The economists say this means the CNE center could have sent messages back to polling stations to alter the totals.

None of this would matter if the auditing process had been open to scrutiny by the Carter observers. But as the economists point out: "After an arduous negotiation, the Electoral Council allowed the OAS [Organization of American States] and the Carter Center to observe all aspects of the election process except for the central computer hub, a place where they also prohibited the presence of any witnesses from the opposition. At the time, this appeared to be an insignificant detail. Now it looks much more meaningful."

Yes, it does. It would seem that Colin Powell and the Carter Center have some explaining to do. The last thing either would want is for Latins to think that the U.S. is now apologizing for governments that steal elections. Back when he was President, Mr. Carter once famously noted that the Afghanistan invasion had finally caused him to see the truth about Leonid Brezhnev. A similar revelation would seem to be in order toward Mr. Chavez.

Despite being a major energy exporter, Venezuela is currently mired in economic recession and suffering from record-high levels of inflation, a dismal condition known as “stagflation.” As the country’s economy deteriorates on a number of fronts, the government continues to struggle with an electricity crisis and worsening food shortages that are threatening to undermine support for the ruling party in the lead-up to September legislative elections. The Venezuelan government has tried to impose a range of currency controls, from currency devaluations to parallel market crackdowns, in an effort to resuscitate the economy. But the country’s distortionary and unsustainable currency regime not only is forcing more of the economy underground (leading to higher inflation and shortages of basic goods), but it is also catalyzing an elaborate money-laundering scheme that now appears to be spiraling out of control, thereby weakening the regime’s grip on power.

Analysis

From the energy and food sectors to banks and steel mills, Venezuela has been on an aggressive nationalization drive over the past four years in order to draw more money into state coffers while increasing the number of Venezuelan citizens who are politically (and economically) beholden to the state for their livelihoods. While this policy has brought a number of short-term benefits to the government, it has come at the cost of gross inefficiency, mismanagement and corruption, leading to an overall decline in Venezuelan productivity. In an attempt to redress the extreme macroeconomic imbalances, Venezuelan President Hugo Chavez was forced to make a substantial adjustment to the country’s fixed peg to the U.S. dollar. On June 8, the Venezuelan government devalued the bolivar against the dollar by 17 percent and 50 percent, simultaneously creating a dual exchange-rate regime.

The Currency Regime

An exchange rate of 2.15 bolivars per dollar was established for “essential goods,” such as food and medicine, while all other items used a weaker rate of 4.3 bolivars per dollar. The parallel market that used to exist in tandem (and where, unregulated, the dollar recently cost upward of 8 bolivars) is now strictly regulated by the Venezuelan government in a trading band of 4.2 to 5.4 bolivars per dollar, making the parallel market the third official exchange rate. For all intents and purposes, that parallel market was the closest thing to a genuine exchange rate that the country had because the other two rates were subsidized and access to them was restricted by the government.

Clearly there are problems with the current arrangement. Although dual or multi-tiered exchange rate regimes do provide the government with the ability to impose tighter capital controls, address economic imbalances and make imported goods more affordable, they are inefficient and difficult to manage. In most economic systems, the cost of capital is the single most important factor for determining growth and development, and when the cost of capital has three different values, entire sectors shift (and even disappear). For example, the ability to import food for a third of the real market price via the “essential” exchange rate largely destroys incentives to produce food locally. Unsurprisingly, countries with such regimes most often experience lower growth and much higher inflation than countries with a single, unified exchange rate. To mute the very high reported inflation (about 32 percent annually, according to Venezuela’s central bank), the government has militantly enforced price repression, which is beginning to cause shortages of even the most basic goods (since it makes more financial sense for businesses to stop producing altogether than be able to sell only at artificially low prices).

(click here to enlarge image)

Second, since the parallel rate was upward of 8 bolivars per dollar before the government began regulating the market, even the weakest possible official rate — the 5.4 at the weakest end of the official trading band — would still be overvalued. With dollars becoming harder to obtain in the regulated markets, more of the economy is being driven underground, and it is probably only a matter of time before another black market emerges (assuming that such a market has not already emerged). The existence of another parallel currency market would bring the total number of foreign exchange rates in Venezuela to four — the subsidized rate, the petrodollar rate, the now-regulated parallel rate and a new black-market rate — the consequences of which would be dizzying.

Moreover, because multi-tiered exchange-rate regimes skew the value of money, they also reward particularly creative individuals and companies who can figure out ways to shuffle goods back and forth through the exchange regime (for example, by placing an import order for a good at one rate, importing it at another and selling it at a third). The various and intricate incentives that arise from distortionary currency regimes invariably lead to spiraling corruption and fraud. Venezuela’s currency regime is no exception, especially since practically all public-sector entities have the ability to import via the most subsidized rate by virtue of their being public enterprises.

The Gaming Process

Conspicuously enough, warehouses have recently been discovered in Venezuela containing mountains of rotting food, expired medications and unusable electricity-generating equipment — at a time when Venezuela is ostensibly suffering from severe food and power shortages. However, there’s a very logical reason why the warehouses are filled with “essential” goods. The most apparent is that the mismanagement of state entities responsible for the purchasing and distribution of these goods renders them unable to keep up with the logistical demands of their trade. The state-run entity Bolipuertos (of which the Cuban government holds a significant stake) that runs Venezuela’s ports, for example, is years behind on its repair schedule. As a result, goods arriving at Venezuelan ports will often sit for weeks and months without the necessary electricity and refrigeration to preserve them. But the less obvious — and more nefarious — reason is that many of the ports are also mafia-run, and Venezuela’s state-owned companies and their subsidiaries are exploiting their privileged access to the subsidized exchange rate in order to enrich themselves. Simply put, there may be deliberation behind many of these shortages.

Before the government began regulating the parallel market, which more accurately reflected the forces of supply and demand (and thus the bolivar’s genuine value), private Venezuelan companies would finance anywhere from 30 to 40 percent of their imports through a dollar/bolivar rate of about 8. However, all state-owned enterprises can exchange just 2.6 bolivars for one U.S. dollar, provided that the dollar goes toward importing a good on the government-determined list of essential goods. So, the game is this: maximize the bolivar amount exchanged at the subsidized rate, minimize the dollar amount that has to be spent on importing the goods and pocket the difference.

Overstating the price, or intended amount, of goods to be imported — be they actually essential or simply deemed essential for the sake of participating in this racket — would provide the importer with extra U.S. dollars, as would directing the import business to friends in return for cash or favors.

For the importers to earn the “inefficiency premium” they charge on this process, they would want to be careful not to kill their golden goose by actually meeting the market demand for goods. So long as there exists a “shortage” of that particular good, the importers can make a strong argument for why they need to import even more of the goods — hence the “inexplicable” warehouses of essential goods containing unusable power-generating equipment and rotting food.

The Food Example

While any item on the government’s essential goods list is a potential candidate for the scam, food is perhaps the best “vehicle” simply because it is perishable, people have to eat and there will always be demand. The drawback to food as the vehicle, from the government’s point of view, is that bare shelves in food markets can quickly present an insurmountable challenge for even the most resilient of regimes. Venezuela imports about 70 percent of its food, most of which now comes from the United States, Brazil and Argentina (Caracas has sustained a de facto trade embargo on Colombian food imports over the past year). Since 2003, the government has placed heavy price controls on foodstuffs and has steadily harassed private food companies with charges of speculation and fraud to justify the state’s unwavering nationalization drive.

In Venezuela, the state-owned energy firm Petroleos de Venezuela (PDVSA) — the country’s main revenue stream — is also responsible for much of the country’s food distribution network, a primarily cash-based business that makes tracking transactions all the more difficult. PDVSA subsidiaries work to restrict food supply in the country, thereby increasing demand and increasing their own profit when they turn around and sell food on the black market. Those that have squirreled away vast amounts of food can, for a hefty profit, supply the overwhelming demand for food on the black market. The fact that PDVSA is responsible for much of the country’s food distribution makes it much easier for those subsidiaries to corner the food market — they can both create the shortage (by hoarding food) and be there to satisfy the pent-up demand (with the food they’ve hoarded).

The two main PDVSA subsidiaries that operate in this particular money-laundering scheme are PDVAL and Bariven. PDVAL was created in January 2008 with a stated goal to correct the speculation of food prices through its own distribution network. Bariven, the acquisition arm of PDVSA, is tasked with obtaining materials for oil exploration and production, but it is also involved in managing inventories for PDVSA, a responsibility that extends into the food sector. From its headquarters in Houston, Bariven will place an order for food imports from American exporters in Texas and Louisiana. PDVSA Bank, a murky new entity whose creation was announced in the summer of 2009, was set up to facilitate banking agreements between PDVSA and Russian state energy giant Gazprom, and is believed to provide loans for such food-import transactions. (Bariven is also known to secure loans from major U.S. banks and is one of a select few state entities that has preferential access with the Commission of Foreign Exchange Administration in Venezuela to trade bolivars for dollars to facilitate these exchanges.) Bariven will then sell the food to PDVAL at a hefty discount, yet will report an even transaction on the books. The food will then sit on the docks until it is close to its expiration date, thus restricting supply in the state-owned markets and building up demand. When the food is already rotting (or close to it), it is sold on the black market for a profit (it’s no good to sell the food to the normal government distribution network, where the price of food is tightly controlled). Since PDVAL is the entity that collects all the revenue from state food distributors, the bolivar-denominated proceeds from its food sales can then be discreetly recycled back into PDVSA Bank, where the bolivars can be used again to place ever-increasing orders that will require more dollars and more imports.

The orders have increased to the point that the distributors are throwing out thousands of tons of rotting food. This is the root of a scandal that broke in Venezuela in May, when state intelligence agents began investigating the theft of powdered milk and found between 30,000 and 75,000 tons (estimates vary between state and opposition claims) of food rotting in warehouses in Puerto Cabello, La Guaira, Maracaibo and other major ports.

The above example describes how the money-laundering scheme is playing out in the food distribution sector, but the same concept can be applied to the electricity, medicine and energy sectors. The priority of many officials working in the state-owned electricity company EDELCA is to enrich themselves through a similar money- laundering scheme in which they can exploit and arbitrage the exchange-rate regime, place exorbitant orders for parts, airbrush their books and then pocket the difference. Unlike the engineers working on the power plants, state electricity officials ordering parts lack technical knowledge and have no interest in consulting the engineers when placing the orders. The result is a mishmash of parts and equipment collecting dust in warehouses while power rationing continues across the country. Even more alarming is the fact that Brazilian engineers for Eurobras, a Brazilian-German-Venezuelan consortium, abandoned their work on Venezuela’s Guri dam in May after having failed to receive their paychecks from EDELCA. The work they were doing — the implementation of larger and more efficient hydroelectric turbines — was highly specialized and crucial to Venezuela maintaining its electricity output. Yet EDELCA, having already reaped its profits from placing the contract orders for the parts, apparently had little motivation to come up with the funds to allow these workers to finish the job. This is why, despite better-than-expected rainfall over the past couple months, Venezuela remains mired in an electricity crisis since the dilapidated electricity infrastructure is incapable of keeping up with demand.

The money-laundering scheme is prevalent in many strategic sectors, but the food sector brings especially unique benefits to the money launderers while raising the stakes for the Venezuelan leadership. Since food is perishable, it readily lends itself to hoarding and “screw ups” when it goes rotten, requiring more orders, more dollars and more imports. By contrast, while one can still make money by importing a dozen hydroelectric turbines or an expensive new oil rig, there are only so many excuses for having ordered the wrong piece of equipment, and the black market for such equipment is not nearly as good as the black market for food (which, again, is essential for survival).

While this elaborate racket has kept a good portion of state officialdom financially content, the warehouses full of rotten food, expired medicine and unused electricity equipment, along with the gross neglect and disrepair of the Guri dam — a vital piece of the country’s electricity infrastructure — indicate that the state is losing control over the “essential” sectors. In short, this racket has become so prevalent that it is now threatening the core stability of the state. This is why, despite the obvious political risk of exacerbating food shortages and basic supplies by increasing the costs for importers, the Venezuelan regime has put most of its effort in the past month into cracking down on the “speculators” in the parallel market. The cost of not doing something about these speculators has proved to be higher than the cost of alienating political supporters in the lead-up to legislative elections in September.

When the food scandal recently broke, the government was quick to name its scapegoat: former PDVAL President Luis Pulido, who, along with several other officials, has been arrested and put on trial for corruption. The Chavez regime is using PDVAL as an example to others who have taken the money-laundering scheme to dangerous levels. Many of those who are most deeply entrenched in the racket and have been less conscious of the long-term risk to the state are the more radical officials within the Chavez government, who are now being sought out by Cuban intelligence services working in league with the upper echelons of the Venezuelan regime. But these efforts could be too little too late. Cracking down on speculators who are operating outside the state’s jurisdiction may alleviate part of the problem and provide the state with a cover to expand its control over key sectors, but what of the vast numbers of speculators working within the state, particularly those higher up the chain who could pose a real threat to the regime’s hold on power?

Indeed, the government’s most recent attempts to rein in this food scandal are already showing signs of floundering. A June 26 ban on unregulated food sales passed in the wake of news about the scandal was revoked shortly thereafter by the president himself, who called on authorities to target the “food mafias” behind the gaming scheme as opposed to the sellers on the streets. The problem with such a directive is that those involved in the food mafias are likely to involve members high up in the regime, which makes the likelihood of enforcement questionable. The government is also introducing new legislation that aims to sideline speculators from the gaming process by changing the currency-for-food transactions altogether. The draft legislation, entitled the Organic Law for the Promotion and Development of the Community Economic System, calls for food in local communes to be “bought” and “sold” primarily through bartering. For exchanges of non-equal value, the legislation calls on communes to create their own currencies (independent of the bolivar) to buy and sell food on the local level. The local communes’ strategy is encompassed in a package of legislation dubbed “People Power,” which aims to undermine state and city governments while augmenting the power of community councils (220 local communes have been listed by the government thus far.) The majority of members of these communes would come from the ruling United Socialist Party of Venezuela (PSUV,) thereby providing the regime with direct access to small, local governing bodies that will stay loyal to PSUV interests.

Though the idea of sidelining money launderers from the cash-based food industry makes strategic sense from the point of view of a government trying to reverse the crippling side-effects of this gaming scheme, a number of pitfalls can already be seen in this legislation. Introducing dozens of alternative currencies for a specific sector will further complicate the already-complicated two-tiered currency exchange regime that differentiates between essential and non-essential foods, while undermining an already-weak bolivar by cutting the local currency out of the food trade. A proliferation of local currencies also means additional layers of bureaucracy will be necessary to manage and implement the new law, and more bureaucracy in Venezuela means more potential for corruption. The local food currency would also eventually have to be transacted into bolivars, and deep-seated corruption in the higher levels of the institutions responsible for such large-scale transactions could end up greatly undermining the primary objective of the plan to root out speculation. In short, the government is still treating the symptoms, and not the cause, of this money laundering scheme and the proposals made thus far to rein in speculators look to have a number of shortcomings.

The Legal Battle

A crackdown within the regime’s inner circle to rein in this racket could turn politically explosive, especially when senior members of the Chavez government already appear to have piles of evidence stacked against them in U.S. courts. In mid-May, Chavez publicly warned in a speech broadcast on state television station Venezolana de Television that a U.S. district judge in Miami may soon be ordering the arrest of Chavez, Vice President Elias Jaua, Minister of Planning and Finance Jorge Giordani and other members of the president’s inner circle, “instead of the real culprits.” Chavez’s unusual warning is yet another manifestation of how the state’s money-laundering scheme has grown too large and too loud for the regime to manage. Venezuelan businessman and banker Ricardo Fernandez Barrueco, for example, was a close associate of Venezuelan political elites like Public Works and Housing Minister Diosdado Cabello and the president’s older brother, Adan Chavez. Barrueco is believed to have used his main business front, the Proarepa Group, to open a number of offshore accounts in the Caribbean, Lebanon, Europe and elsewhere to store funds looted from the state oil firm and its subsidiaries. Barrueco’s operation eventually got too exposed and he became a liability for the regime, leading to his reported arrest in November 2009. But silencing Barrueco alone will not assuage the regime’s concerns over the evidence sitting in courts in Miami and New York that could implicate senior members of the Chavez regime.

Other Beneficiaries

Considering the prevalence of the black market, it would appear logical that the country’s unsustainable currency arrangement is benefiting a number of other illicit actors. For those state entities experiencing cash-flow problems, local drug dealers (who have expertise swapping currency at multiple rates in multiple places) are believed to be providing local currency to at least some of these firms and thus filtering their drug money through the exchange-rate regime. The drug revenues are also strongly believed to form the basis of Venezuela’s financial support for U.S.-designated terrorist groups like the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN) — allegations which are now regaining steam following Colombia’s recent decision to release new evidence of Venezuelan support for FARC and ELN rebels.

Driving the U.S. interest in this issue is the connection between Venezuela’s money- laundering scheme and Iran. In recent years, in an effort to escape the heavy weight of economic sanctions, Iran has turned to Venezuela to facilitate Iran’s access to Western financial markets. Banco Internacional de Desarrollo (EBDI) is a financial institution based in Caracas that operates under the jurisdiction of the Export Development Bank of Iran, designated as a sanctions violator by the European Union as recently as July 27 and by the U.S. Treasury Department in October 2008 for providing financial access to the Islamic Revolutionary Guard Corps (IRGC), a major force in the Iranian economy and the prime target of the U.S. sanctions campaign. Though the extent to which Iranian money is funneled through Venezuelan channels is unclear, evidence has been building in the United States that reveals murky transactions among IRGC-owned companies, a Caracas-based EBDI subsidiary, PDVSA entities in Europe and the Caribbean and even banks in Lebanon. And with the U.S. sanctions effort accelerating in Washington, any state willing to enforce the sanctions and crack down on IRGC-affiliated entities can shut down these financial loopholes at any point. STRATFOR cannot quantify the Iranian-Venezuelan money-laundering connection, but any such connection to the IRGC would be a red flag for U.S. Treasury officials looking to fortify sanctions against Iran.

Combined with the developing money-laundering and drug-trafficking cases in Miami that threaten to implicate senior members of the Venezuelan regime, the Iranian link is yet another tool that Washington could use to pressure the Venezuelan government should the need arise. Putting the significant enforceability issues of such court cases aside, the district court attorneys preparing these cases against the Chavez government would not be able to launch them without the permission of the Obama administration, given the diplomatic fallout that could follow. So far, there are no indications that the administration is looking to pick this fight with Chavez, but the mere threat that Washington is now able to hang over the Chavez regime’s head is enough to make the Venezuelan leader nervous, hence his public warning to his constituents that Washington is preparing a grand conspiracy against him. The nightmare scenario for Caracas is one in which the White House chooses to expose the charges against the regime and use the evidence to justify a temporary cutoff of the roughly 12.5 percent of U.S. crude oil imports (47 percent of Venezuelan crude exports) that the United States receives from Venezuela for just enough time to crack the regime. Though Venezuela is far down on the U.S. foreign-policy priority list, making such a scenario extremely unlikely for the moment, Venezuela’s vulnerability to Washington’s whims is increasing with each day that this money- laundering scheme shows signs of unraveling.

In addition to the money-laundering scheme explained above, the Venezuelan economy is currently dealing with a rash of other problems:

The devaluation has only been partly effective and the short-term benefits have largely run their course. Devaluing helps recalibrate the bolivar by bringing it closer to its true (lower) value, but it does not address the underlying causes of continued bolivar weakness. Therefore the bolivar remains overvalued and the supply of foreign exchange (U.S. dollars) to the market is still restricted. Cracking down on the parallel market and regulating it will likely lead to the emergence of another black market. Consequently, the fixed exchange rate will again become overvalued, which will eventually require further devaluation (most likely after the September elections), which will generate more inflation.These problems are forcing the government to take increasing control of and/or regulate large sectors of the economy, while state-owned companies that control the most strategic sectors are having cash-flow problems and are unable to manage these sectors.The currency regime has given rise to widespread fraud and corruption; the scheme described above is just the most visible one. There is undoubtedly more corruption and fraud permeating the system, exacerbated by the multi-tiered exchange rate and the government’s restricting access to it.The economy is becoming increasing reliant on PDSVA oil revenues while the non-oil economy buckles. Venezuelan non-commodity exports are too expensive, and the government must increase its imports of goods to make up for domestic production shortfalls. This makes the economy increasingly reliant on the dollar revenues generated by the state-owned oil company, which has experienced declining production for almost a decade.All these problems combined are raising the political stakes for the Venezuelan government. The government’s response to the crisis has been to bolster its control of the economy — particularly its control over the most strategic sectors — in an effort to slow the economic decline. The government has shut down or nationalized hundreds of businesses in the wake of January’s devaluation for various stated reasons, including price gouging, hoarding and speculation. More recently, the government made sweeping changes to the mandate of the Venezuelan Central Bank to vastly expand its influence over the real economy. And in an effort to both clean the books and root out the speculators, hundreds of brokerage firms have been shut down by the state. Without the technical skills and basic logistical ability to manage enlarged state enterprises, however, the state is exacerbating the very symptoms it is trying to treat. Venezuela still has dollars to draw from the central bank and the state development fund Fonden to delay its day of reckoning, but it can no longer conceal the unsustainability of this economic regime.

Maybe this brave and articulate young Venezuelan could carry the flag forward in the next election...

IBD Editorial

The Killing Fields Of Caracas 08/25/2010

Socialism: Quick, what's the murder capital of the world: Kabul? Juarez? Try Caracas, Venezuela, a city whose dictator, Hugo Chavez, has made murder a means of extending his control.

The silent protest at Monday night's Miss Universe Pageant in Las Vegas was invisible to nearly everyone — except Venezuelans. On her final catwalk, the ranking Miss Universe, Stefania Fernandez, suddenly whipped out a Venezuelan flag in a patriotic but protocol-breaking gesture.

Fernandez waved her flag for the same reason Americans waved theirs after 9/11 — to convey resolution amid distress. Her flag had seven stars, significant because Chavez had arbitrarily added an eighth, making any use of a difficult-to-find seven-star banner an act of defiance.

Fernandez's countrymen went wild with joy on bulletin boards and Facebook, showing just how worried they are about their country. Their greatest fear is violent crime.

Ever since Chavez became president in 1999, Venezuelan cities have become hellholes in which murder rates have more than quadrupled. At 233 per 100,000, or one murder every 90 minutes, the rate in Caracas now tops that of every war zone in the world, according to an official National Statistics Institute study released Wednesday.

In fact, crime is the defining fact of life in today's Venezuela. About 96% of all murder victims are poor and lower-middle class, the very people Chavez claims to represent. "Don't venture into barrios at any time of the day, let alone at night," warns the Lonely Planet guide to Venezuela to hardy adventure travelers.

By contrast, the murder rate in cartel-haunted Juarez, Mexico, is 133 per 100,000, with Mexico's overall rate 8 per 100,000, about the same as Wichita, Kan. Colombia, fighting a narcoterror war since 1964, has an overall rate of 37 per 100,000, slightly higher than Baltimore at 36.9. The overall U.S. rate is 5.4.

Make no mistake, a murder rate like Caracas' is a crime against humanity. The absence of personal security renders all other human rights moot. By coincidence, that's just what Chavez seeks to eliminate as he turns his country into a Cuba-style socialist state. Instead of Castroite firing squads or Stalinesque gulags, Chavez outsources the dirty work of socialism to criminals while throwing dissidents in jail and threatening to censor newspapers.

He may try to suppress the Dante-like photos of corpses piled high at the Caracas morgue from the El Nacional newspaper, but the hard fact is that Chavez is responsible for what's going on.

Tomorrow, September 26, is election day in Venezuela. We will be voting for members to the National Assembly, our version of Congress. After difficult and prolonged haggling, the opposition managed to agree on a unity slate. I wonder just effective this will be. In our system, half the candidates are elected by name, just like in the USA but the other half are elected by party list and I have no idea who might be on those lists. These lists could have a very strong dilutive effect on the results. In any case, this is the best chance we have had in a long time to take back the legislative body now controlled entirely by Chavez through his puppets.

The voting process is entirely mechanized and really well organized. We all have a national ID card. Enter your "Cédula" (the ID number) and you'll get all the info about your polling station.

The gentleman is Henry Castellanos Garzón alias "ROMAÑA." He will not be voting tomorrow because he is dead! He was killed by the Colombian military in the recent raid that killed "Mono Jojoy" the second in command in the narco-terrorist FARC.

Chavismo brags about having the most modern electoral system in the world, it's all computers and telecommunications and the data arrives at the CNE just as soon as the voting stations are tallied. Even Iran can report results in two or three hours but it took the Venezuelan CNE about eight to give "partial" results. Think what you will, I think data massage, not even Chavistas can be this incompetent. Maybe I'm over estimating them.

The National Assembly seats 165 deputies. Anyway, with 52% of the popular vote the opposition only gets 62 seats vs. 94 for Chavismo which leaves 9 undecided. The frightening aspect of this balance is that Chavismo retains 2/3 majority which they can use to pass "major" laws (leyes organicas) which they have used to further the expansion of XXI Century Socialism.

Frankly, I tire of politics. I tire of TV. I haven't had a TV set in my home for about 17 years. If you want to add days to your life, I recommend you get rid of yours, it frees up time to live a life and not waste away as a couch potato. These days I keep up with the news via the WWW and the email I get from a select group of friends. Since I'm not as up to date as I could or should be with our political parties I had to study the voting card to see what was happening.

Can you believe there were 56 political parties represented in my district? It's mind boggling that such a system could ever produce a working government except through hour long haggling in smoke filled back rooms where the pork is cut up and parceled out. How can anything good for the country come from that? The opposition through the so called "Unity Table" (Mesa de Unidad MUD) and primary elections, managed to pick a single set of candidates backed by well over 95% of the opposition parties. Considering the distorted results achieved through gerrymandering against a united front, think what the results would have been against a divided opposition. Curiously, it was Chavismo that was divided, one or two Chavista parties broke ranks and fielded their own candidates. But even that does not seem to have helped the opposition in the final tally.

Sorry for the over long introduction but some background was necessary. I studied the 56 cards trying to figure out who was what. The Chavista parties were easy enough to single out (and discard) but that still left about 40 opposition parties. Can you believe it, there is not a single right wing party in the whole lot! Miguel Octavio of The Devil's Excrement fame, a banker, is voting for Causa R because he likes their leader. Causa R (what's left of it) happens to be a left wing party born of the Labor Union movement. What the heck is a banker doing backing the Labor Movement just because this party is currently opposed to Chavez?

Do you see the muddle we are in?

When Venezuelans go to the poll we are offered three choices:

XXI Century SocialismXX Century SocialismIXX Century Socialism

Hard to tell which is worse. We know the XXI Century Socialism is the Road to Ruin. IXX Century Socialism led to communism and the failed Soviet Union. F. A. Hayek famously called XX Century Socialism The Road to Serfdom. Has Venezuela gone mad? Maybe not.

When the land is not overly bountiful Man has to work to make a living. As societies grow in size, the work of individuals has be organized and no better way has been found than Adam Smith's "invisible hand" of the market and free markets imply capitalism. When the land is oversupplied with wealth, there is much less need of work, just reach up and grab a banana or drill down and find oil. Since no work is required, the mechanism of wages is not available to spread the wealth. Instead, you distribute the wealth through government programs and subsidies. This is not what socialism was supposed to be but it is what socialism has become.

There are hundred of "reasons" to give people subsidies: because they are old, or young, or students, or pregnant, or invalid, or out of work, or sick, or any other reason you care to come up with. All of a sudden, healthcare and food are "human rights" which they were not when we had to work for them.

One can live in a socialistic society like Venezuela has been for decades provided that your economic freedom is not impaired, as long as government is willing to let a free market coexist with government run socialism. During the 40 years between General Marcos Perez Jimenez and Lieutenant Colonel Hugo Chavez we had eight more or less pragmatic socialist governments and life was mostly good, at least initially. Socialism or mismanagement eventually wore the economy down and social unrest brought our current despot to power. But the problem with Chavez is not that he is a socialist. The problem is that he is an idealist who thinks that only His way should be allowed. His inferiority complex is ruining my country!

Thank you Denny for firsthand accounts. The whole Chavez story is very sad for the people. I hope you will tell us what you think the U.S. can do to help; I assume it is nothing. Here we seem to be headed down a similar road. Now we have an uprising, the tea party, and maybe a shift in one body of congress. After that I fear we will head further down the same road, what you call 21st century socialism, forced redistributionism and a dismantling of the freedoms and pillars that used to make this a great place.-----------http://www.washingtonpost.com/wp-dyn/content/article/2010/09/27/AR2010092702257.html

Voters in Venezuela have stopped President Hugo Chavez from obtaining the two-thirds majority the Socialist leader said he needed in the National Assembly to effortlessly pass what he calls critical reforms.

According to incomplete returns released Monday, Chavez's United Socialist Party on Sunday won at least 94 of 165 seats, while his most ardent foes took 60. The rest of the votes had either not been determined or went to a small leftist party...

Rough translation (freetranslation.com) of one paragraph of Denny's last Spanish post:

Opposition wins same number of votes to Chavez party but they win 37 fewer seats. Why is that? No answer, attack the questioner.--------------More than a question, was "the" question: "The difference among the votes obtained by its party, the Socialist Party United of Venezuela (PSUV), and the ones that has achieved the Table of the Democratic Unit (MUD) is of barely 100,000. And it is difficult to understand that having obtained almost the same number of votes, the opposition have reached 37 seats less than the PSUV [finally would be from 33 the difference]. I ask me if would be being confirmed the thesis of the opposition that maintains that the redistribution of the electoral circuits was done with the intention of favoring to the PSUV or that perhaps the vote of the PSUV is worth for two. ..”. What responded him Chávez? Nothing. Did not it know that to respond him and, faithful to its style, attacked against her.

Thank you Denny for firsthand accounts. The whole Chavez story is very sad for the people. I hope you will tell us what you think the U.S. can do to help; I assume it is nothing. Here we seem to be headed down a similar road. Now we have an uprising, the tea party, and maybe a shift in one body of congress. After that I fear we will head further down the same road, what you call 21st century socialism, forced redistributionism and a dismantling of the freedoms and pillars that used to make this a great place.

The only thing I wish from America would be for Obama and various Democrats and Hollywood types to stop backing Chavez. Unfortunately, Socialism is a world wide movement. They don't deny it, on the contrary, that is one more way they seek power. Not only that, they have co-opted the UN

Quote

On 20 September the Socialist International held the annual meeting of its Presidium with the participation of Heads of State and Government at the United Nations Headquarters.

XXI Century Socialism is the official Chavez slogan for his movement. He has publicly called himself a Marxist.

Countries have to relearn forgotten principles. America in great measure has discarded the principles of the Founding Fathers but maybe through the Tea Party movement, a true grass roots movement, there will be a revival of these principles. Yes, there are a lot of similarities between Chavez and Obama. The one big difference is that Chavez was able to rewrite the Constitution and to rearrange all the forces in Venezuela so as to take absolute control of the country. He has also committed treason by letting Cuba run the place. He even forced the Armed Forces to adopt the Cuban slogan: "Patria, Socialism o Muerte" (Homeland, Socialism or Death).

SummaryThere are a number of indications that the Venezuelan government has expanded its cooperation with Colombia to include possible intelligence sharing and restricting the movement of Revolutionary Armed Forces of Colombia rebels in Venezuelan territory. This cooperation will help strengthen a shaky rapprochement between Bogota and Caracas and sheds light on the growing vulnerabilities of the Venezuelan regime.

AnalysisSTRATFOR sources within the Colombian security apparatus recently indicated that during the past two months, the Venezuelan government has taken steps to undermine a safe haven for members of the Revolutionary Armed Forces of Colombia (FARC) along Venezuela’s border with Colombia. The sources claim Venezuelan military officials did not encounter substantial resistance when they quietly told the FARC leaders to pack up their camps. Colombia was already making steady progress in its offensive against the FARC, but once FARC members were flushed across the border back into Colombia, the Colombian military had fresh targets and leads to pursue. The most notable recent success for Colombia was the Sept. 22 killing of FARC deputy and senior military commander Victor Julio Suarez Rojas (aka Jorge Briceno and El Mono Jojoy) in a long-planned military operation in the La Macarena region of Meta department in central Colombia. Though it is unclear whether Venezuelan cooperation had anything to do with the operation, Suarez Rojas was apparently concerned about a drop in Venezuelan support in the days leading up to his death.

Prior to the Sept. 22 operation, Suarez Rojas allegedly wrote an e-mail acquired by the Colombian government attempting to elicit support from members of the Union of South American Nations, in which he claimed responsibility on behalf of FARC for an Aug. 12 vehicle-borne improvised explosive device attack on the Radio Caracol headquarters in Bogota. In the e-mail, which was read to the press by Colombian President Juan Manuel Santos on Oct. 2, Suarez Rojas said the FARC’s autonomy in its operations had “angered the Cubans, Chavez and company. For this reason, they are disrespectful and at times joined the ideological struggle of the enemy (i.e. the Colombian government) to fight us.”

If the intercepted e-mail was, in fact, written by the slain FARC commander, the message is highly revealing of the tensions that have been building between the rebel group and the Venezuelan regime. Though Venezuela continues to deny the claims, Colombia has presented evidence that FARC members have for some time operated freely in the porous borderland between Venezuela and Colombia. The Venezuelan armed forces are believed to provide tacit support to these rebels, along with the Cuban advisers present throughout the Venezuelan security apparatus, and the FARC and military together benefit from the rampant drug trade along the border. The Venezuelan government shares a leftist ideology with the FARC that is often cited as the main factor linking the two. But in reality, just as Pakistan has backed Kashmiri militants against India and Iran backs Hezbollah against Israel, Venezuela’s support for the FARC is primarily designed to constrain its main regional adversary — and thus distract Bogota from entertaining any military endeavors that could threaten Venezuela’s territorial integrity, particularly the resource-rich Lake Maracaibo region. Venezuela’s fears of Colombia are also amplified to a large degree by the close defense relationship Bogota shares with Caracas’ other key adversary: the United States.

But a strategy to back the FARC also comes with risks, as Venezuela was reminded in mid-July when Colombia unveiled to the Organization of American States what it called irrefutable photographic evidence of Venezuela harboring FARC rebels. Though Venezuela vehemently denied the claims and painted the Colombian move as a power struggle between then-outgoing Colombian President Alvaro Uribe Velez and incoming Santos, there appears to have been real concern among the upper echelons of the Venezuelan regime that Colombia had a smoking gun to justify hot-pursuit operations and preemptive raids against the FARC in Venezuelan territory.

Generally, Venezuela will exploit the threat of a Colombian attack to rally the population around the regime and distract Venezuelans from the domestic economic turmoil and rampant violent crime. This time, however, the Venezuelan government publicly downplayed the threat and apparently made concrete moves to cooperate with the Colombians against the FARC. That decision is revealing of the regime’s insecurity, as it is already afflicted by a deepening economic crisis fueled by rampant corruption schemes in state-owned sectors. Following the Sept. 26 legislative elections in which the ruling party lost its two-thirds supermajority, Venezuelan President Hugo Chavez is now scrambling to get legislation passed that would augment his executive power before January 2011, when more seats in the National Assembly will be filled by the opposition. Rather than gamble that Colombia would refrain from military action, the Venezuelan government has instead offered its cooperation to keep Bogota at bay.

The extent and sustainability of that cooperation remains unclear, however. Venezuela is exercising caution in how it deals with Colombia for now, but the country’s internal conflicts are expected to grow. The weaker Venezuela becomes, the more anxious it will be about its rivals’ intentions. Moreover, Venezuela will want to avoid inviting a backlash by FARC rebels who are now feeling abandoned by their external patron. The Venezuelan regime will thus try to strike a balance, offering as much cooperation as necessary to keep relations steady with Colombia, while holding on to the FARC card as leverage for rougher days to come.

Thank you Denny for firsthand accounts. The whole Chavez story is very sad for the people. I hope you will tell us what you think the U.S. can do to help; I assume it is nothing. Here we seem to be headed down a similar road. Now we have an uprising, the tea party, and maybe a shift in one body of congress. After that I fear we will head further down the same road, what you call 21st century socialism, forced redistributionism and a dismantling of the freedoms and pillars that used to make this a great place.

The only thing I wish from America would be for Obama and various Democrats and Hollywood types to stop backing Chavez. Unfortunately, Socialism is a world wide movement. They don't deny it, on the contrary, that is one more way they seek power. Not only that, they have co-opted the UN

Quote

On 20 September the Socialist International held the annual meeting of its Presidium with the participation of Heads of State and Government at the United Nations Headquarters.

XXI Century Socialism is the official Chavez slogan for his movement. He has publicly called himself a Marxist.

Countries have to relearn forgotten principles. America in great measure has discarded the principles of the Founding Fathers but maybe through the Tea Party movement, a true grass roots movement, there will be a revival of these principles. Yes, there are a lot of similarities between Chavez and Obama. The one big difference is that Chavez was able to rewrite the Constitution and to rearrange all the forces in Venezuela so as to take absolute control of the country. He has also committed treason by letting Cuba run the place. He even forced the Armed Forces to adopt the Cuban slogan: "Patria, Socialism o Muerte" (Homeland, Socialism or Death).

Chávez's Secret Nuclear ProgramIt's not clear what Venezuela's hiding, but it's definitely hiding something -- and the fact that Iran is involved suggests that it's up to no good.BY ROGER F. NORIEGA | OCTOBER 5, 2010

Venezuelan President Hugo Chávez admitted last week that his government is "carrying out the first studies" of a nuclear program. He attempted to portray it as an innocuous program designed solely for peaceful purposes.

On Sept. 21, I held a briefing for journalists and regional experts where I revealed for the first time information about Chavez's nuclear program and his troubling and substantial collaboration with Iran. This research -- conducted during the past 12 months by a team of experts who analyzed sensitive material obtained from sources within the Venezuelan regime -- paints a far darker picture of Chavez's intentions.

Chávez has been developing the program for two years with the collaboration of Iran, a nuclear rogue state. In addition to showing the two states' cooperation on nuclear research, these documents suggest that Venezuela is helping Iran obtain uranium and evade international sanctions, all steps that are apparent violations of the U.N. Security Council resolutions meant to forestall Iran's illegal nuclear weapons program.

The consequences from the U.N. or the Obama Administration will be what?**The same China faces for seizing Japanese islands. The same Iran faces for building nuclear weapons to use on Israel and the US.**

Venezuelan President Hugo Chávez announced the purchase of the Russian S-300 missilesystem on 17 October 2010. Experts speculate Chávez may buy two Antónov 74 planes aswell. Iran previously attempted to buy the same missile system but was rejected inaccordance with UN Security Council Resolution 1929.

Geopolitics: Years ago, Americans worried about Venezuela's leftist Hugo Chavez becoming a new Castro — with oil. It happened. Now he's filling his cabinet with drug lords, and the threat morphs into something creepier.

Last week, Chavez promoted Major General Henry Rangel Silva to general-in-chief, the top position in the Venezuelan military command.

It was a rogue act because, in 2008, the U.S. Treasury's Office of Foreign Assets Control named Rangel and two other Chavez loyalists as "Tier II Kingpins" for material support of drug trafficking.

The U.S. designation came of an administrative process so strict and thorough the U.S. government could indict someone if it's right — and be sued if it's wrong. There have been no lawsuits.

Rangel is said to provide material support for Colombia's FARC communist terrorists, who control 60% of Colombia's cocaine production, pushing it into Mexico and other destinations.

With Mexico endangered by local cartels' trade with Venezuela's government-linked suppliers, the link to Mexico's drug war is very real. And it's a national security problem for the U.S. — a big one.

The promotion shows Chavez is surrounding himself with drug lords. Most leaders would expel someone with those credentials. Not Chavez. He almost seems to be flaunting Rangel and others like him. One can only conclude that Venezuela is now a narcostate.

With seven other Chavez loyalists also on the Treasury's list (but not yet announced) the rot is far deeper than the U.S. wants to admit. The only real question left is what will we do about it?

It's important because drug lords have turned Mexico a battlefield. Violence on the U.S.-Mexico frontier began in 2005, the same year Chavez stopped cooperating with the U.S. Drug Enforcement Administration. In 2006, Mexican President Felipe Calderon began his six-year term by declaring war against the drug cartels. So far, it has cost 30,000 lives, and the war's now spilling over our borders.

Two Fridays ago, Mexican marines killed Antonio Cardenas, the chief of the Gulf Cartel, in a shootout that shut the U.S. border with Mexico down. Cardenas' war was fueled by people like Rangel.

Now, there are even people who can prove it. Last August, Colombian forces captured a major Venezuelan drug lord named Walid Makled-Garcia, who'd had a falling out with Chavez.

Makled was so high-ranking the U.S. Drug Enforcement Administration last week declared him the "King of Kingpins" after his indictment in New York. Until this summer, Makled commanded Venezuela's air and seaports. His gigantic jetliners loaded with tons of cocaine flew from "the presidential ramp" headed for Mexico.

Makled says he kept records and tapes of his encounters with Rangel, and other top Venezuelan military and intelligence leaders, bribing them to let his drug jets take off. He made $1.4 billion from his work — about the same amount as Chapo Guzman, Mexico's richest cartel chief, whom Forbes magazine estimates is worth $1 billion.

In 2006, Makled's records show, a DC-9 loaded with five and half tons of cocaine crashed in Mexico. It was discovered by Mexican police before it could reach its "buyer" — who happened to be the Sinaloa drug lord Guzman, known for his shootouts in Juarez.

There's also a political aspect emerging in that Mexican war: In recent news item about a child assassins turning up in Mexico, Mexican police report that these gangs are being protected by Chavez's leftist political ally in Mexico, the PRD Party. If PRD continues in this way, it may soon become a leftist drug insurgency, like FARC.

It all pushes the question of what to do about Chavez to a new level of urgency. Right now, Colombia must decide whether to extradite Makled to the U.S. to tell everything he knows about Chavez, or to send him to Venezuela, where he is likely to be killed.

Chavez asked for Makled first, and the murders he's charging him with are graver than the U.S.' cocaine-smuggling charges. Chavez badly needs to silence him to promote his generals.

The Obama administration has its own dilemma — does it want Makled to talk, or does it just want to sweep him and his shocking revelations under the rug as war continues to rage in Mexico?

Jun 17: Hugo Chávez poses for a photo with Fidel and Raul Castro from his hospital room in Cuba.

Hugo Chávez extended stay in a Cuban hospital is because he is in critical condition, according to a report in El Nuevo Herald.

The Venezuelan president, who was last seen in public June 9 and last heard from on June 12, on a phone call with Venezuelan state television, was said to have been treated for a pelvic abscess in Cuba.

During the call Chávez said that medical tests showed no sign of any "malignant" illness.

But according to the report in El Nuevo Herald, Chávez finds himself in "critical condition, not grave, but critical, in a complicated situation."

The Miami newspaper cited U.S. intelligence officials who wished to remain anonymous.

Chávez silence has led to chatter and speculation in Venezuela that the socialist leader is actually suffering from prostate cancer. Intelligence officials could not confirm a diagnosis of prostate cancer...

As Venezuela's Hugo Chávez convalesces in a Havana hospital, his condition is shrouded in secrecy. The party line is that he had emergency surgery on June 10 for a pelvic abscess. But he has not been seen in public for more than two weeks and speculation is rampant that he is battling something more serious.

His critics ought to be careful what they wish for. While conventional wisdom holds that the demise of Mr. Chávez would set Venezuela free, it may instead make the country more repressive. If there is any justice in the world, he will return to Venezuela to marinate in his own stew—the economic disaster he has created over the past 12 years. A serious illness that takes him out of play would leave Venezuela haunted by the ghost of chavismo much as Peronism has haunted Argentina for the past half-century.

Some Venezuelans think they smell a rat. With living standards steadily declining in their country and popular discontent rising, these skeptics say that Mr. Chávez is looking for a way to revive his image. A triumphant return to Caracas, after he was believed to be near death in Cuba, might do the trick. If his "resurrection" coincides with the July 5 celebration of the nation's bicentennial anniversary, for which a Soviet-style military extravaganza is planned, it would be even more spectacular.

For the half or more of the population that opposes the Venezuelan strongman, even the thought of such a comeback is unbearable. They detest his never-ending decrees and manipulation of the law. But what rankles most among those who oppose him are his theatrics, like seizing the airwaves several times a day to sing songs and deliver demagogic rants. A hero's return is likely to heighten this narcissistic behavior. It is also true that he has said he will not leave power even if he loses the election next year.

Still, it is worth considering the alternative outcome. Because Mr. Chávez has destroyed institutions in order to foster a cult of personality, his mortality implies sheer chaos—as well as opportunity for the violent and ambitious. The bloodbath for power would not be between democrats and chavistas. It would be between the many armed factions that he has nurtured. Once victorious the winner will try to inherit his power by insisting that the nation worship his memory. Since none of his likely successors shares his charisma, repression is likely to get worse.

Cuba will be ready to help. The Castro brothers have long provided the security and intelligence apparatus that Mr. Chávez uses to stifle dissent. In exchange, Mr. Chávez funnels at least $5 billion annually to the island regime. The survival of that symbiotic relationship would be a top priority for the Cuban military dictatorship.

That a recovered Mr. Chávez would organize a welcoming committee for himself there is no doubt, and he might even get a bump in the polls from it. But he will also have to take responsibility for a host of Bolivarian-made problems.

For starters, he will have to confront the heavily armed mob that has taken over the El Rodeo prison in the state of Miranda, and the families of nearly 2,000 inmates whose lives are at risk. These are his constituents and he has promised to make the prison system more just. But things have only gotten worse during his presidency.

The Americas in the NewsGet the latest information in Spanish from The Wall Street Journal's Americas page. .The nongovernmental organization, Venezuelan Prison Observatory (OVP), estimates that facilities built for 14,000 inmates now hold more than 49,000. It also says that almost 46% of those detained are in "judicial limbo" and do not know "the status of their case." According to the OVP, there was a 22% increase in prison deaths in the first quarter of this year over the same period last year. Since 1999 over 4,500 inmates have died.

El Rodeo is emblematic of a wider problem for Mr. Chávez: The most vulnerable Venezuelans are still waiting for him to deliver on his promises of a better life. Until now he has bribed them with subsidies and rhetoric. But near 30% inflation is destroying their income and his words are getting old.

The 30,000 families who lost their homes in the floods last fall were supposed to be a priority for his government. But they are still without shelter, and their protests are growing louder. Mr. Chávez has pledged to build 153,000 new homes this year, but in the first quarter only 1,600 were completed.

Add to this food shortages, electricity blackouts, capital flight and one of the worst crime rates in the hemisphere, and it's not surprising that the economic outlook is so bleak. Oil and drug trafficking have kept the military satisfied until now. But the patience of the masses will one day hit its limit. When it does, they ought to have the opportunity to direct their wrath at the architect of their misery.

But the patience of the masses will one day hit its limit. When it does, they ought to have the opportunity to direct their wrath at the architect of their misery.

Let's see...

It took the USSR 70 years and a weak government for it to collapse.Castro is in power after more than 50 years of misery.The Red Chinese Communist party is still in power after more than half a centuryGaddafi is in power after 43 years and is stalemating NATO

I wonder what the WSJ reporter smokes? It must be THE BEST SUFF. There are some prerequisites for dictators to fall. A weak government like Gorbachev's that does not have a stomach for killing civilians. Weapons in the hands of the oppressed. This can happen if the military turns coat as happened in some Balkan states after Tito. A foreign invasion like Iraq. Absent one or more of the above, the dictator is likely to die of natural causes while still in power.

The rest of the article is pretty good. I believe that if Chavez dies there will be wars of succession on the Chavista side and possibly in the oppo side as well. I have become convinced that the revolution is about the drug trade. Evo Morales is a "former" drug cartel capo. The Colombian FARC is about drug trade. Adan Chavez, Hugo's brother, is the reputed Venezuelan Drug Chief. Whoever gains power gains immense wealth and influence as well. The drug wars in Mexico point out that killing competitors, like the Mafia used to do (or still does) pays huge dividends. That's the motivation on the Chavista side for a war of succession. The Venezuela oppo has been highly fragmented each contender going after a piece of the pie that is not theirs for the taking. Only after multiple electoral failures did the oppo manage to come up with "unity" candidates who did OK. If they now perceive a less charismatic Chavista candidate, a candidate easier to defeat, they are likely to go back to fragmentation and lose again.

BTW, there are plenty Chavistas out there meaning that if the fighting spills to the streets, it could get really ugly.

Venezuelan President Hugo Chavez called a number of his closest advisers Monday from Cuba, where he is reportedly recovering from emergency surgery. Chavez was visiting Cuba on June 10 when a sudden pain in his abdomen reportedly required his immediate hospitalization and surgery. STRATFOR sources close to the Cuban medical team say Chavez has prostate cancer. Chavez has refused to delegate power even temporarily during his absence, an indication of how little he trusts his closest advisers and allies in the government. Although Chavez seems likely to hold onto power in Caracas despite the current complications, the crisis in the country raises important questions about the future of the Venezuelan state, whose government and power structure have been built around a single, iconic figure.

“It remains plausible that a political transition would allow Venezuela the space to reconsider and potentially realign both its political and economic positions— whether the presidency goes to a Chavez loyalist or a representative of a new faction of power brokers.”A regional precedent for the current predicament can be found among Chavez’s ideological brethren. Former Cuban President Fidel Castro suffered a medical complication in 2008 and was forced to step down, abdicating power to his slightly younger brother, Raul Castro. Fidel ruled Cuba for nearly 50 years and was the linchpin of the country’s governing strategy. In 2008, Fidel stepped into the background, allowing Raul to pioneer changes to the economy that have begun to bring Cuba closer to finding compromise with its neighbor, the United States.

Castro had the option to step down because he trusts his brother. It is not clear to whom Chavez can turn in the event he finds himself incapacitated. Although his brother Adan Chavez appears to be positioning to take over, Chavez has so thoroughly split power among all possible successors that any would-be ruler will have to fight to maintain control.

Nevertheless, Castro’s example shows us that even the most iconic leader must eventually hand over authority.

We do not know whether Chavez will have to make this choice now. It remains plausible that a political transition would allow Venezuela the space to reconsider and potentially realign both its political and economic positions— whether the presidency goes to a Chavez loyalist or a representative of a new faction of power brokers.

Venezuela must deal with a handful of fixed economic realities. Oil remains at the center of everything, from growth and investment to politics. With all capital concentrated in the oil sector, development without a redistributive model is very difficult. Venezuela’s efforts to develop agricultural self-sufficiency struggle against a mountainous geography and a tropical climate. A high reliance on imports for basic foodstuffs means that inflation will always be a present danger.

Some economic and political characteristics of the Chavez administration could undergo serious changes following a power transition. Since the failed 2002 coup, in which he perceived U.S. involvement, Chavez has been working hard to diversify fuel exports away from the United States and toward partners like China and Europe as a way of reducing his vulnerability to the U.S. market. However, not only is the United States the largest oil consumer in the world, it is also geographically close to Venezuela. Diverting oil exports to other markets — let alone markets on the other side of the planet — costs the Venezuelan oil industry. With oil at over $100 per barrel, there is room to maneuver, but when every dollar gained through oil exports is needed to satisfy populist demands at home, the opportunity costs of walking away from Venezuela’s largest natural market become apparent..

This practice and other economic policies have left the Venezuelan economy in a fragile state. Oil production is declining, the electricity sector is failing, inflation is perennially high, and the government’s debts are climbing higher. This month may not be the moment for change in Venezuela, but Chavez’s sickness highlights the vulnerabilities of a country that relies so heavily on the dictates of a single leader. Ironically, the system of dividing power among competing factions guarantees Chavez’s unchallenged control while he is healthy. However, it makes it exceedingly difficult for him to delegate power to a trusted second in this hour of need.

It is good to hear from Denny S on the scene even though the message isn't exactly optimism: "It took the USSR 70 years and a weak government for it to collapse."

"I have become convinced that the revolution is about the drug trade."

Interesting take. It always looks like the theme is Marxism, which really is some form of Stalinism. Too many people for reasons unknown to me are willingly transferring what power they had over to tyrants to rule them.

We do it on a different scale here in the U.S., but we are always devising programs and giving away rights in ways that can't be easily undone in the next election.